High coal prices will continue weigh on margins of domestic metal companies, with no immediate relief in sight, rating agency Icra Ltd. said. Earnings of the industry would continue to remain under pressure in the second half of the current fiscal, following a dull performance in the first half of FY23, the report said. “Elevated coal costs along with metal price corrections remain the key headwinds affecting the margins, with no immediate relief in sigh." According to the rating agency, domestic primary manufacturers have been facing a surge in energy costs, in the aftermath of Russia-Ukraine conflict, which coupled with a shortage in rake and coal linkage
availability have affected their operating performance. Consequently, the industry has had to rely on costlier domestic coal from e-aubtions, the premia of which almost touched over 400% in May last year. While this has eased in recent months, it remains high at around 240% compared to the historical average of 50-55%.
“In the next fiscal, however, some respite is expected from better availability of coal linkages. On the other hand, international prices of base metals have contracted by a steep ~35-50% in FY2023 so far, compared to the record high in March 2022. While prices have improved by 5-10% after October 2022, the same is expected to remain range-bound at the current levels, given the uncertain global economic outlook," the Icra said.
Icra’s forecast for operating profitability of domestic players is almost 3 percentage points lower compared to its earlier forecast made in September last year and 10 percentage points lower compared to FY22.
“In FY24, while some respite is expected from better availability of coal linkages, the profitability is expected to remain range-bound at 19-20%,“ Jayanta Roy, senior vice-president and group head, Corporate Sector Ratings, Icra, said. “Also, our base case does not factor in any significant adverse impact of another pandemic led demand destruction in CY2023."
